2013 Ontario BudgetChapter III: Federal–Provincial Relations

Highlights

Ontario is committed to working with the federal government to ensure the people, communities and businesses of this province benefit from an effective and modern system of federal-provincial fiscal arrangements. To reach that goal, Ontario calls on the federal government to:

Build the Economy Together

Ensure federal funding for employment and training services is more flexible, so that Ontario can better support the needs of its labour market.

Do more to improve the fairness and transparency of the Employment Insurance System.

Deliver sufficient infrastructure investment to Ontario that is flexible enough to support Ontario's long-term infrastructure priorities.

Demonstrate leadership by dedicating federal funding for public transit.

Collaborate to Support the People of Ontario

Include Ontario as a full partner with the federal government in immigration selection and settlement.

Establish a Fair Fiscal Arrangement

Work with other provinces and territories to make federal-provincial fiscal transfers more fair and efficient.

Improve Retirement Incomes

Work with provinces to implement a modest, fully funded enhancement to the Canada Pension Plan.

Overview

Ontario, like the rest of Canada, is now operating in a post-recession world of a rapidly evolving economy, growing competition for skilled workers, an aging population, and communities with increasingly diverse needs. These circumstances present challenges, but also new opportunities for growth. In this new environment, Ontario is building a prosperous and fair society founded on a strong, competitive economy. To do this effectively, Ontario needs cooperation among all orders of government.

The federal government makes investments across a wide range of areas that affect Ontario's economy, businesses, communities and families. Federal policies and funding for labour-market training, infrastructure, Employment Insurance, emerging and existing sectors, and international trade have a major influence on Ontario's economy. The federal government also affects the lives of the people of this province through its role in affordable housing, immigration selection and settlement, support for Aboriginal peoples, and retirement income programs. To determine if the existing federal fiscal architecture benefits the people of Ontario, it is important that federal arrangements be examined broadly to assess their ability to support Ontario's economic, health and social priorities.

Leading up to the 2013 federal budget, Ontario called on the federal government to address corporate tax avoidance and the underground economy, invest in a long-term infrastructure plan, and renew support for labour-market training programs that were ending. The federal government touched on these priorities in its recent budget; however, the joint design and implementation of the infrastructure and labour-market measures will be critical to their success. The federal government needs to work with Ontario and other provinces to maximize flexibility for provinces to support their economies, invest in their own infrastructure priorities and build healthy communities.

Ontario will build on past collaboration with the federal government and seek to move forward together in a way that uses public dollars effectively, demonstrates value for money, and is fair to the people of Ontario.

Building the Economy Together

Labour Market Training

Ontario has invested significant resources to incorporate former federal programs into provincial priorities and create a more integrated system of employment and training services. Ontario has achieved significant results through current labour market and training programs and its partnership with the federal government.

Employment Ontario helped more than 290,000 people access training and find work in 2012, and also connected more than 90,000 employers with qualified employees.

Since June 2008, Second Career has helped over 65,000 people who live in Ontario participate in training.

However, existing agreements such as the LMA and Labour Market Development Agreement (LMDA) contain differing program and client-eligibility requirements and allocation methodologies that limit Ontario's ability to maximize the benefits of an integrated delivery approach. That is why Ontario had been calling on the federal government to allow greater flexibility to design and deliver programs and services that better meet the evolving needs of workers, communities and businesses. Ontario has also repeatedly called for devolution of remaining federal employment and training programs for youth and people with disabilities to reduce duplication across both orders of government.

The federal government has not responded to Ontario's repeated calls. Instead, the 2013 federal budget included plans that would limit provincial flexibility in the use of LMA funding, beginning in 2014–15. By 2017–18, 60 per cent of the federal government's $500 million national LMA funding would be directed to the newly announced Canada Job Grant, which would require contributions from provinces/territories and employers. The federal government also announced its intention to renegotiate the LMDA and Labour Market Agreement for Persons with Disabilities.

The federal government has introduced uncertainty to the system. Its planned changes to the LMA would divert funding that currently allows Ontario to deliver a range of employment services and skills training supports to serve underrepresented groups, including immigrants, Aboriginal peoples, people with disabilities and social assistance recipients. Many people from these groups are not eligible for Employment Insurance funded services. Ontario needs to engage all of the people of this province to expand its labour force, support employers and help better match skills with available jobs.

Ontario is committed to working more closely with industry, employers and educational institutions to identify and address emerging skills issues. The Province is best placed to carry out this work as it has established relationships with employers and has the best understanding of its labour-market needs. The Province expects the federal government to recognize provincial expertise in these areas and provide flexibility when renegotiating all three
labour market funding agreements.

Employment Insurance

The landscape of Ontario's labour market has changed drastically since Employment Insurance (EI) was first conceived. The Mowat Centre's Employment Insurance Task Force final report, "Making It Work," indicates that under the current structure, the EI program fails to meet the needs of a modern labour force and continues to treat Ontario's workers unfairly. The people of this province expect and deserve the same support from the EI program as those in other provinces and territories as well as fair treatment under it. The federal government must do more to improve the fairness and transparency of the EI system.

"Many EI components have aged poorly and/or do not work well together. The program is no longer consistent with the objectives of a modern income support program for the unemployed. Overall, the system's design cannot be defended on a principled basis."

Long-Term Investments in Infrastructure

The Province continues to invest in infrastructure that focuses on transportation, health care and education. These priorities are critical to Ontario's economic prosperity and the well-being of its communities—urban and rural, large and small, northern and southern, consistent with the government's long-term infrastructure plan, Building Together.

Investing in infrastructure to support a strong economy and growth in communities is not a task that the Province can, or should, tackle alone, particularly given Ontario's significant role in the national economy. In 2013–14, Ontario plans to invest over $13 billion in infrastructure, whereas the federal government plans to invest less than $6 billion in provincial, territorial and municipal infrastructure across the country. Building and maintaining modern infrastructure is key to realizing the economic potential of Canada.

Subsequently, the federal government's 2013 budget announced a new, 10-year Building Canada plan for infrastructure. Canada is following Ontario's lead in making sustained and predictable investments in infrastructure that focus on promoting economic growth and productivity. In line with Ontario's recommendations, the federal government's new plan recognizes the importance of effective asset management planning and innovative partnerships with the private sector.

The new Building Canada plan needs to deliver sufficient investment to Ontario and be flexible enough to support Ontario's infrastructure priorities, such as public transit. Under the new federal plan, funding should be allocated appropriately, in ways that deliver maximum economic returns. That is why Ontario has called on the federal government to deliver funds using primarily per-capita calculations, as well as relevant metrics for strategic infrastructure investments. This is a strategic approach that aligns investment with actual economic activity, while also being fair and equitable.

Ontario looks forward to working collaboratively with the federal government as further details of the new Building Canada plan are developed. The Province is committed to delivering a plan in partnership with the federal government that promotes Ontario's strategic infrastructure priorities and meets the unique needs of its communities.

Dedicated Funding for Public Transit

Notably missing from the new Building Canada plan was a national public transit strategy. Ontario encourages the federal government to deliver dedicated funding for public transit that will support a national public transit strategy and the engines of national economic growth — Canada's urban and suburban communities. A national public transit strategy is critical, given the numerous economic benefits of public transit to move commuters to and from work, attract businesses and skilled employees to cities, and manage traffic congestion. Congestion drives away skilled employees, wastes labour productivity, slows the movement of goods, and hinders the ability of businesses to operate and grow.

Improving public transportation can also help reduce greenhouse gas emissions and improve the quality of life of the people living in Ontario. Public transit allows people to connect to the economy and access educational opportunities and services outside their neighbourhoods. Furthermore, with an aging population, more people may rely on transit in their everyday lives and public transit systems will need to be even more accessible and coordinated.

Ontario acknowledges the contributions made by the federal government to public transit systems across Canada and in Ontario, particularly in major metropolitan areas like the Greater Toronto and Hamilton Area (GTHA), Ottawa and the Waterloo Region. For example, to meet the mobility needs of Ottawa's growing urban population, Ontario and the federal government have each committed up to $600 million in funding to support rapid transit in the City of Ottawa. To support rapid transit in the Waterloo Region, Ontario has committed up to $300 million and the federal government has committed up to $265 million.

Ontario has invested over $16 billion to support public transit across the province since 2003 and plans to invest significantly in transit going forward, but it also requires the federal government's support. It is vital that the federal government dedicate transit funding as part of a national public transit strategy. Funding that is long term and predictable is key to expanding transit services, promoting the integration of transit systems, and managing congestion to keep cities moving and working efficiently.

Ontario will encourage the federal government to deliver targeted funding for public transit systems based on relevant metrics such as the share of total national ridership and population. Given the significant economic and social benefits, public transit remains a high priority for Ontario and it is in the national interest for the federal government to fund it.

Closing Tax Loopholes and Addressing the Underground Economy

To ensure that everyone pays their fair share of taxes, Ontario continues to work with the federal government on enhanced compliance activities to address corporate tax avoidance and the underground economy. See Chapter IV: Tax, Pension and Financial Services for a discussion of Revenue Integrity and the Underground Economy.

Supporting Ontario's Leading Sectors

Manufacturing

Ontario encourages the federal government to continue making strategic investments in Canada's leading industries, including Ontario's manufacturing sector. Ontario will parallel the federal government's proposed extension of the temporary accelerated Capital Cost Allowance for manufacturing and processing machinery and equipment acquired in 2014 or 2015. See Chapter IV: Tax, Pension and Financial Services for more details.

Support for Clean Energy

Ontario has become a North American leader in clean energy with its commitment to replace coal-fired electricity generation with cleaner sources, the feed-in-tariff program and a variety of conservation programs. In its August 2012 report, "Canada's Emissions Trends," the federal government recognized Ontario's important contributions to meeting Canada-wide greenhouse gas emission reduction targets under the Copenhagen Accord. However, the federal government continues to provide significant support for energy sectors other than renewables, which does not meet the needs of Ontario. Enhanced federal support for clean energy would help Ontario transition to a low-carbon economy.

Ontario is seeking federal support and the appropriate regulatory environment for an east-west transmission grid that would transmit electricity across provincial borders. Greater regional integration of electricity grids would encourage the development of new, larger-scale renewable projects that would benefit the economy, both in Ontario and elsewhere in the country.

Ring of Fire

The Ring of Fire is one of the most promising mineral development opportunities in Ontario in almost a century. Located in Ontario's Far North, current estimates suggest multi-generational potential of chromite production and significant production of nickel, copper and platinum. Ontario is committed to working with the federal government and industry to support the development of the Ring of Fire region. Development of the region will support socio-economic opportunities for remote First Nation communities, as well as economic opportunities for Northern Ontario.

Ontario wants to ensure a strong partnership with First Nation communities on the proposed development. The Province is working with First Nation communities and the federal government to discuss environmental monitoring, socio-economic and community development, regional infrastructure and resource revenue sharing opportunities.

Agricultural Support

Agriculture is a shared federal-provincial responsibility in Canada. Through the recently renewed Growing Forward 2 multilateral framework agreement, the Ontario government receives federal support for 60 per cent of the cost of eligible programs.

The opportunities in primary production and food manufacturing, and in developing agricultural-based bio-products, are immense. The Ontario government will work with these sectors to reach higher and achieve even greater success. The Province will work with the agri-food and agri-product sectors to support strategic investments that take advantage of market opportunities at home and abroad.

To supplement a national suite of support programs, the Ontario government is committed to continuing to support the provincial Risk Management Program, as redesigned in consultation with Ontario commodity groups.

Ontario is also exploring other innovative approaches to managing producer risk, such as the Ontario Corn-Fed Beef Risk Management Fund, which allows producers to take greater leadership and ownership in ensuring price stability. Ontario has provided some seed funding and encourages the federal government to match it since these kinds of initiatives could reduce fiscal pressures for both Ontario and Canada.

Access to Global Markets

Ontario is working with the federal government to pursue new trade agreements that would improve access for exporters to foreign markets and benefit Canadian consumers. The Canada-European Union Comprehensive Economic and Trade Agreement (CETA) would improve access to the largest and one of the richest markets in the world. Ontario supports the development of CETA under a framework that addresses Ontario's interests in supply management and pharmaceutical-related intellectual property. Canada is also negotiating a Trans-Pacific Partnership with a number of countries as well as trade agreements with India and Japan.

Collaboration to Support the People of Ontario

Immigration

The Ontario Immigration Strategy responds to the province's demographic and economic realities. The Province will be proactive in attracting the best and brightest in the world to Ontario, and helping immigrants and their families to settle and prosper. In the spring of 2013, the Minister of Citizenship and Immigration will be convening an Employers' Table to better support employer immigration needs and challenges, and to improve labour-market outcomes for Ontario's immigrants.

Given Ontario's continuing contribution to the national economy, the Province expects the federal government to work in partnership with Ontario to build a better immigration system and provide effective settlement programs.

To support the Ontario Immigration Strategy, the Province calls on the federal government to:

make Ontario a full partner in immigration selection and settlement; and

raise Ontario's number of Provincial Nominees to 5,000.

Sustainable Investments in Social and Affordable Housing

Ontario welcomes the five-year extension of the Investment in Affordable Housing program announced in the 2013 federal budget. This program is expected to continue providing funding for the construction and renovation of affordable housing units, as well as home ownership assistance, rent supplements, shelter allowances, and the renovation and repair of accommodations for victims of family violence. Ontario will work with the federal government in the development of an extension to the Investment in Affordable Housing program.

While the extended Investment in Affordable Housing program will help increase the stock of new affordable housing units and repair units built since the mid-1990s, it will not help repair the existing stock of older social housing units, some of which are over 50 years old. The Province calls on the federal government to make long-term, predictable investments in social housing. There are currently more than 150,000 households on waitlists for social housing in Ontario, up 24 per cent from 2003. The lack of affordable and appropriate shelter is a barrier to health, education and employment.

On-Reserve Education

Last year, the Commission on the Reform of Ontario's Public Services highlighted the need for the federal government to work with provinces and to bring education funding for First Nations on-reserve up to parity with per-student provincial funding for elementary and secondary education.

"The Commission believes that there is an urgent need to significantly improve the provision of on-reserve First Nations education in the province... There is a substantial and growing gap in educational attainment between First Nations peoples living on-reserve and the rest of the Canadian population."

Commission on the Reform of Ontario's Public Services, "Public Services for Ontarians: A Path to Sustainability and Excellence," February 2012, p. 209.

The federal government has chronically underfunded on-reserve First Nation education, but recently announced new investments to support postsecondary educational attainment for First Nations and Inuit students. These investments, however, do not address the investment needed in on-reserve schools for kindergarten through Grade 12. Whether they live on-reserve or not, the Province believes that all children should have the same opportunities and that the federal government has an obligation to make those opportunities available and accessible. The federal government should provide adequate funding for First Nation education that at least reaches parity with per-student Provincial funding for elementary and secondary education. Working with Aboriginal communities to improve educational and economic outcomes has the potential to create benefits across the province.

"Closing the education and labour-market gaps between Aboriginal and non-Aboriginal communities would grow Canada's Gross Domestic Product (GDP) by $401 billion over a 25 year period (Centre for the Study of Living Standards, 2009)."

First Nation Policing

Federal government support for policing through the Police Officers Recruitment Fund expired on March 31, 2013. The program provided annual funding of $31.4 million to support up to 329 police officers in communities across Ontario, including 40 First Nation police officers. As the federal government has not committed to extend this funding, the 2013 Budget provides additional annual funding of $4 million to continue to fund the 40 First Nation police officers hired under the Police Officers Recruitment Fund to ensure the safety of Ontario's First Nation communities.

The Province cannot step in every time the federal government decides to cut funding. To continue to ensure the safety of Ontario communities, the Province calls on the federal government to fully fund the police officers hired under the Police Officers Recruitment Fund and to make the funding permanent.

Establishing a Fair Fiscal Arrangement

When the current set of federal-provincial fiscal arrangements was first introduced, the federal government sought to work with provinces and territories to establish a system of health and social services that would define the country. The values associated with providing quality public services to all Canadians still resonate deeply in Ontario; however, much has changed since their introduction. Canada's fiscal arrangements must be able to provide support to all governments to deliver vital public services, as well as respond to the economic and demographic challenges facing the country.

Although the Canadian economy is fundamentally strong, it faces a number of important economic and labour-market challenges. These come at a time when government budgets are already stretched in the aftermath of the global economic and financial crisis.

Increasing productivity growth could make provincial economies more competitive; however, recent trends have been disappointing. Private-sector labour productivity growth still lags behind that of key U.S. competitors. In addition, an aging population presents demographic challenges for the labour force. To keep Canada's workforce strong and competitive, governments need to work together to ensure immigrants, Aboriginal peoples, and young people are able to fully integrate into the labour market and realize their potential. Across Ontario and many provinces, more people are moving into urban centres, stretching the limits of existing infrastructure.

The country's challenges are not just domestic. Over the past decade, the growing importance of emerging economies has transformed the global economic landscape. Canada has benefited from favourable increases in terms of trade, but a high dollar has put pressure on the cost competitiveness of some export-oriented manufacturing, particularly in Ontario.

In addition to economic challenges, governments are concerned about growing fiscal imbalances across provinces and relative to the federal government. Studies by the Council of the Federation (COF) and Canada's Parliamentary Budget Officer demonstrate the difficult fiscal challenges facing provinces over the long term, relative to the sustainable fiscal prospects of the federal government.

The Mowat Centre's report, "Filling the Gap," estimates that there is an $11 billion shortfall between what the people of Ontario pay in federal taxes versus what they receive in federal transfers and services. Furthermore, Ontario's fiscal capacity drops from fifth to last among the provinces once federal transfers are taken into account (see Chart 3.1). It is increasingly clear that the current system of federal-provincial fiscal arrangements is working against, not for, the people of this province.

"Given current federal spending and program decisions, the burden Ontario is being asked to carry is out of line with the principle of equity and is undermining Ontario's prosperity and quality of life."

A good example of an arrangement that works against Ontario and needs to be modernized is the Equalization program. The difference between what the people of Ontario pay into the Equalization program through federal taxes and what the Province receives back from the program is $3.1 billion (see Chart 3.2), or about $226 per person in 2013–14. Over the past 10 years, Ontario has contributed approximately $50 billion to the Equalization program. Ontario remains the largest net contributor to the program despite fast-growing, resource-based economies in Western Canada.

Ontario is committed to the principles of the Equalization program. However, it will not support a system of transfers that puts Ontario's public services at risk and provides inequitable levels of support to different parts of Canada.

Modernizing the fiscal arrangements is not just an issue of concern to Ontario; it is an issue that resonates with all provinces and territories. At the July 2012 COF meeting, Premiers from across the country decided to work together to develop proposals to modernize and rebalance fiscal arrangements. A Fiscal Arrangements Working Group was tasked to undertake this joint work.

As host of the COF conference at Niagara-on-the-Lake this summer, Ontario will look to continue the work with provincial and territorial partners to modernize fiscal arrangements with the federal government in a way that supports jobs and economic growth. This summer's COF meeting is an opportunity to lay the groundwork for a meaningful and forward-looking conversation on Canada's fiscal architecture.

Ontario believes that productivity, labour markets and infrastructure should be a core focus of the conversation on modernizing Canada's fiscal architecture. This fiscal architecture should be reformed and evaluated against benchmarks that matter to Canadians. Ontario believes a modern system of fiscal arrangements will:

promote economic growth, job creation and prosperity;

support sustainable and comparable public services;

restore the fiscal balance in the federation; and

establish a genuine partnership between both orders of government.

Improving Retirement Incomes

Since 2010, Ontario has committed to a comprehensive strategy for improving retirement incomes, including a modest, fully funded enhancement to the Canada Pension Plan (CPP).

At the December 2012 Finance Ministers' meeting, provinces and the federal government agreed to work together to define a modest enhancement and determine the economic conditions necessary to implement an enhancement. A CPP enhancement would help improve retirement income adequacy for virtually all workers by providing them with more predictable earnings replacement in retirement. Ontario looks forward to continuing its work with other provinces and the federal government to implement a modest, fully funded enhancement to the CPP.

Chart Descriptions

Chart 3.1: In 2013–14, Ontario’s Fiscal Capacity Is Fifth But Federal Transfers Bring Ontario to Last

This chart presents provinces ranked by per-capita fiscal capacity — before and after federal transfers — for 2013–14. Before transfers from the federal government, Ontario’s fiscal capacity ranks fifth compared to other provinces based on own-source revenues in 2013–14. After transfers from the federal government are included, Ontario’s fiscal capacity drops to last. Both before and after federal transfers, the top three provinces in terms of per-capita fiscal capacity are Alberta, Newfoundland and Labrador, and Saskatchewan. British Columbia falls from fourth to fifth after federal transfers. Quebec falls from sixth to seventh after federal transfers. Manitoba falls from seventh to ninth after federal transfers. Nova Scotia moves from eighth to fourth after federal transfers. New Brunswick moves from ninth to sixth after federal transfers. PEI moves from tenth to eighth after federal transfers.

Chart 3.2: Net Contribution to Equalization by Province, 2013–14

In 2013–14, Ontario is the largest net contributor to the Equalization program. Ontario is followed by Alberta, British Columbia, Saskatchewan, and Newfoundland and Labrador. All other provinces receive more in Equalization payments than their taxpayers contribute through federal taxes.